Small business owners are subject to unlimited personal liability without realizing they are at risk.
Entrepreneurs and small business owners are personally responsible for each and every debt of the business, whether the debt is a simple account payable, a warranty claim or a claim for personal injuries. This unlimited liability occurs because the most common forms of business entity are sole proprietorships and general partnerships. If a small business has two or more principals, it is most likely to be a general partnership. A general partnership usually exists even if the relative ownership interests of the principals are different (even if one of the principals is only a one percent owner). No matter how big or small your ownership is in a general partnership, your liability is the same.
The potential risks and exposure business owners face from unlimited liability can be very small or significant, depending on the nature of each particular business; however, such unlimited - even though that is the easiest and cheapest in the short run. Rather, the risk of exposure to claims resulting from the business should be examined and evaluated. A sole proprietorship or simple oral general partnership may be an adequate form of organization.
The best way for business owners to reduce their liability is to incorporate the business or to set up their business as a limited liability company (“LLC”). The benefits of incorporation can be achieved only by preparing and filing the necessary papers with proper state authorities - generally the Secretary of State for that particular state - and by taking other necessary steps to create and maintain a corporation.
Every business is different. Before you start a new business, you should consult with experienced business attorneys. Existing business owners should consider the various ways to protect their assets from the claims of creditors or claims for personal injury.
For additional information contact George Bellas at 847.823.9030 Ext: 219 or george@bellas-wachowski.com, who is one of seven experienced attorneys at the law firm of Bellas & Wachowski Attorneys at Law who are dedicated to assisting small business owners.